Thursday’s Supreme Court ruling allowing states to force online retailers to collect sales taxes for local jurisdictions, regardless whether those retailers have a physical presence in that state, could stifle what has become a vibrant and innovative online economy.
Small online startups, from Etsy shops to basement businesses that fulfill someone’s lifelong dream, may now be in jeopardy.
Whether that happens depends on each of the 50 states. Collectively, they must keep a sharp eye out for preserving the entrepreneurial nature of the internet, passing laws that exempt businesses whose sales fall below a certain level.
And they should do so with an eye toward simplicity.
Under an old Supreme Court decision, overturned Thursday, Congress alone was empowered to establish rules on local sales tax collections from online sales. However, Congress repeatedly failed attempts to do so. It should be obvious that a broad, national rule on such collections makes more sense than having 50 separate laws, exposing online retailers to about 10,000 different rates.
Now those retailers face all the complexities. Computer software exists to help with this burden, but it comes at a cost.
For years, states have complained of losing billions of dollars per year in sales taxes because of the trend away from brick-and-mortar stores and toward online sales. A person in Utah, for instance, could buy clothing, electronics or other items online from a distant region of the country without having to pay any local sales tax.
This was a legitimate complaint. However, it has been dampened considerably in recent years as large online retailers signed agreements with individual states to collect taxes. Much of the available tax revenue already is being collected.
We agree with concerns expressed in a dissenting opinion by Chief Justice John Roberts, who said the nation’s vibrant online economy has grown and thrived under current rules. “The court’s decision today will surely have the effect of dampening opportunities for commerce in a broad range of new markets,” he said.
He added that the court “breezily disregards the costs that its decision will impose on retailers.”
Roberts noted some of the complexities small businesses might face. New Jersey, for example, taxes yarn differently, depending on whether it is to be used for an art project or to knit sweaters.
Texas taxes deodorant at one rate if it contains antiperspirant, and another if it does not. Illinois taxes Twix as food, and Snickers as candy.
“People starting a business selling their embroidered pillowcases or carved decoys can offer their wares throughout the country — but probably not if they have to figure out the tax due on every sale,” he wrote.
Of course Congress still holds the power to enact rules that simplify tax collections nationwide while protecting small startups. But, as Roberts notes, this court decision likely will remove pressure on Congress to act.
The nation cannot afford to stifle the entrepreneurial and innovative spirit of the internet, which has removed so many of the previous costly barriers against starting a business. The worldwide nature of this new market requires broad and simple taxing rules in order to thrive. Congress is the body best suited for writing these.
Absent that, however, it is important that each state makes simplicity and startup-friendly policies the watchword.